Report to Congressional Requesters

United States General Accounting Office 

GAO 

August 2003 CLEAN AIR ACT 

EPA Should Use 

Available Data to 

Monitor the Effects of 

Its Revisions to the 

New Source Review 

Program 

GAO-03-947 
Consistent with agency guidance, EPA used a limited screening analysis that 

relied on staff’s professional judgment and public comments from earlier 

reform proposals to conclude that the final rule would decrease emissions 

and health risks and not impose significant costs. EPA determined that 

neither the rule’s benefits nor its costs would exceed a $100 million 

threshold that triggers requirements to conduct a more comprehensive 

assessment. EPA issued the rule to streamline the NSR permitting process 

and provide flexibility to industry. For example, the rule provides a 

mechanism for companies to develop plantwide emissions limits, which 

would allow them to make changes in one part of a facility’s operations as 

long as they offset emissions increases with decreases elsewhere within the 

facility. While OMB agreed with EPA’s conclusion that the rule would not 

have significant economic effects, it determined that the rule was significant 

for policy reasons. Therefore, OMB asked EPA if it could better quantify the 

rule’s potential impacts, but the agency lacked the necessary data to do so. 

EPA lacked comprehensive data on the program’s economic impacts, and 

could not predict how many facilities would use the rule’s optional 

provisions. Several states and environmental groups disagree with EPA’s 

conclusions, claiming that it will enable facilities to increase their emissions. 

These parties have filed suit against EPA challenging the rule and also have 

petitioned EPA to reconsider the rule. We did not identify any 

comprehensive assessments that contradicted or supported EPA’s 

conclusions or the assertions of those who oppose the rule. Because of the 

data limitations, it was not possible to verify EPA’s conclusions about the 

rule’s effects. 

Because it lacked comprehensive data, EPA relied on anecdotes from the 

four industries it believes are most affected by NSR to conclude that the NSR 

program (prior to the rule) discouraged some energy efficiency projects, 

such as upgrades to industrial boilers, including some that would have 

decreased emissions. Because the information is anecdotal, EPA’s findings 

do not necessarily represent the program’s effects across the industries 

subject to the program. Several environmental groups disputed EPA’s 

findings. One such group said that factors other than NSR, such as 

economic downturns, discouraged the projects. Furthermore, EPA’s 

conclusion that some projects would have decreased emissions assumed 

that facilities would not increase production after performing the projects. 

However, according to EPA and the executive director of an industry group, 

companies often expand production after implementing energy efficiency 

projects because it is advantageous to maximize production at the most 

efficient facilities. Such expansions could increase emissions and related 

health risks, although EPA asserts that this would be offset by decreased 

production and emissions at less efficient facilities. 

A recent Environmental Protection 

Agency (EPA) final rule changing 

the Clean Air Act’s New Source 

Review (NSR) program—a key 

means to protect public health and 

enhance air quality—has been 

under scrutiny by the Congress, 

industry, environmental groups, 

state and local air quality agencies, 

and the courts. GAO was asked to 

determine the basis of EPA’s 

conclusions that (1) the rule’s 

economic impacts would not be 

significant enough to merit a 

detailed analysis and (2) the NSR 

program, prior to the rule, 

discouraged some energy 

efficiency projects. GAO, among 

other things, reviewed EPA’s 

analysis of the rule and its impacts, 

as well as guidance from EPA and 

the Office of Management and 

Budget (OMB) on analyzing such 

impacts. GAO also met with 

industry and environmental 

stakeholders. 

Because of the lack of data and 

uncertainties about the rule’s 

impacts, we recommend that EPA 

determine what data are available 

to monitor the rule’s effects, 

identify additional data needs and 

ways to fill them, and use the 

monitoring results to determine 

whether the rule has created 

adverse effects that the agency 

needs to address. EPA agreed with 

GAO’s conclusions and 

recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-03-947.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact John 

Stephenson at stephensonj@gao.gov. 

Highlights of GAO-03-947, a report to the 

Ranking Minority Member of the 

Committee on Environment and Public 

Works, U.S. Senate, and another 

requester 

August 2003 

CLEAN AIR ACT

EPA Should Use Available Data to 

Monitor the Effects of Its Revisions to the 

New Source Review Program 
Page i GAO-03-947 Clean Air Act 

Letter 1

Results in Brief 3

Background 5

EPA’s Economic Analysis of the Final Rule Complied with EPA and 

OMB Cost-Benefit Analysis Requirements, but Some 

Stakeholders Have Sought to Have EPA Reconsider the Rule 10

EPA Relied Primarily on Anecdotes from Industries Most Affected 

by NSR to Conclude That it Discouraged Some Energy 

Efficiency Projects 16

Conclusions 24

Recommendations for Executive Action 25

Agency Comments 25

Appendix I Objectives, Scope, and Methodology 27 

Appendix II GAO Contacts and Staff Acknowledgments 29 

GAO Contacts 29

Acknowledgments 29

Table 

Table 1: Chronology of the New Source Review Program 8

Figure 

Figure 1: Percentage of Total U.S. Emissions Released by 

Industrial, Transportation, and Other Sources in 2001 6

Contents 
Page ii GAO-03-947 Clean Air Act 

Abbreviations 

DOJ Department of Justice 

EPA Environmental Protection Agency 

NAPA National Academy of Public Administration 

NSR New Source Review 

OMB Office of Management and Budget 

WEPCO Wisconsin Electric Power Company v. Reilly 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-03-947 Clean Air Act 

August 22, 2003 

The Honorable James M. Jeffords 

Ranking Minority Member 

Committee on Environment and Public Works 

United States Senate 

The Honorable Joseph I. Lieberman 

United States Senate 

Recent changes to the Clean Air Act’s New Source Review (NSR) 

program—one of the act’s key mechanisms for maintaining air quality to 

protect public health—have been the subject of congressional debate and 

have drawn scrutiny from numerous stakeholders, including 

representatives of industry, environmental groups, and state and local air 

pollution control authorities. While some industry officials describe the 

existing program as costly and characterized by uncertainty, 

environmental groups and a coalition of state attorneys general assert that 

it is, and has been, an important component of the Clean Air Act. In recent 

years, the program has become increasingly controversial, as the 

Environmental Protection Agency (EPA) has taken enforcement action 

against companies in several industries, including some electricity 

producers, forest products manufacturers, and petroleum refineries, 

alleging noncompliance with the program. Some of the affected companies 

have agreed to settlements that will cost hundreds of millions of dollars 

and require emissions reductions, while others are in various stages of 

litigation. 

The NSR program, which seeks to protect public health, maintain 

compliance with air quality standards, and preserve and enhance air 

quality in national parks and scenic areas, requires companies that are 

major sources of air pollution to install pollution controls in their facilities 

when constructed. The program also requires companies to install such 

controls in existing facilities when making physical or operational 

changes—such as the addition of new production equipment—that cause a 

significant increase in air emissions.1

 Such changes are called “major 

 1

The thresholds for these so-called major modifications—physical or operational changes 

that cause a significant increase in emissions—vary by pollutant and the air quality status 

of the area in which a facility is located. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-947 Clean Air Act 

modifications.” Congress believed that incorporating pollution controls 

into the design and construction of new and modified air pollution sources 

was generally an efficient way of controlling air pollution from large 

industrial sources. Congress also excluded existing facilities from NSR 

requirements until they made changes that increased their emissions. 

Companies that want to make major modifications in existing facilities 

must apply to state or local agencies for an NSR permit and then install the 

controls. The cost of installing controls varies but can reach hundreds of 

millions of dollars for some facilities, according to an EPA program 

manager. However, companies can qualify for exemptions from these 

requirements if, for example, (1) a modification is considered “routine 

maintenance and repair,” (2) the company agrees not to significantly 

increase its emissions after making a physical or operational change to its 

facility, or (3) the company offsets any emissions increases resulting from 

a change in a facility with emissions reductions achieved elsewhere within 

that facility. 

EPA has long recognized a need to revise the NSR program and began a 

reform process in 1992 that resulted in proposed changes to the program 

in 1996 and 1998. The agency received wide-ranging comments from the 

public on how the program should be revised and held meetings with the 

public and other stakeholders, but did not develop final rules by the time 

the new administration took office in 2001. In May 2001, as part of its 

proposed national energy policy, the Vice President’s National Energy 

Policy Development Group recommended that EPA report to the President 

on the NSR program’s impact on energy efficiency investments, among 

other things. In response to this recommendation, EPA concluded in its 

June 2002 NSR Report to the President, that NSR had discouraged some 

energy efficiency investments at existing industrial facilities. 

After completing this report, EPA modified certain of the proposed 1996 

NSR revisions and finalized them as a rule in December 2002 (hereafter 

referred to as the NSR final rule). According to EPA, the rule will, among 

other things, provide greater certainty for facilities regulated under the 

program and streamline the NSR permitting process while ensuring the 

current level of environmental protection. As part of this process, EPA 

analyzed the rule’s anticipated economic effects, such as its impacts on 

emissions, health risks, the costs of installing and maintaining pollution 

control equipment, and administrative costs incurred by government 

agencies. Under Executive Order 12866 and the Unfunded Mandates 

Reform Act of 1995, agencies must perform detailed assessments of 

economically significant rules—those rules that may have an annual effect 

on the economy of $100 million or more. If a rule’s impacts are not 
Page 3 GAO-03-947 Clean Air Act 

expected to exceed this threshold, a more detailed economic analysis is 

generally not required. According to the Office of Management and Budget 

(OMB), the agency responsible for overseeing agency compliance with 

Executive Order 12866, agencies may use their discretion when 

conducting a screening analysis to determine whether a rule’s economic 

impacts may reach the $100 million threshold and require a more detailed 

assessment. EPA’s Office of Air Quality Planning and Standards has 

developed a guidance document that the agency uses to analyze the 

impacts of air quality rules, which discusses how to conduct a screening 

analysis.2

You asked us to determine the basis of (1) EPA’s analysis of the economic 

impacts of the final rule and its conclusion that the rule would not create 

significant enough benefits or costs to require a more detailed analysis and 

(2) EPA’s conclusions that the NSR program (prior to the final rule) 

discouraged some energy efficiency projects. You also asked us to provide 

information on several other aspects of the final rule and proposed 

revisions to the definition of routine maintenance and repair under NSR, 

which we will address in subsequent reports. 

To respond to these objectives, among other things, we used OMB and 

EPA guidance to review EPA’s screening analysis of the final rule’s 

economic impacts. We also met with the NSR program manager within 

EPA, other senior EPA officials within the agency’s Office of Air Quality 

Planning and Standards, and senior OMB staff within the Office of 

Information and Regulatory Affairs who were responsible for reviewing 

EPA’s analysis. In addition, we reviewed the information that EPA relied 

on in preparing its findings on the NSR program’s effects on energy 

efficiency projects. We also met with representatives of industry and an 

environmental group. Appendix I provides a more detailed description of 

our scope and methodology. 

EPA relied primarily on the professional judgment of agency staff and 

comments it received on earlier NSR revision proposals to conclude in its 

screening analysis that the final rule would not generate benefits or costs 

of more than $100 million and, therefore, that it could proceed with the 

 2

OAQPS Economic Analysis Resource Document, U.S. Environmental Protection Agency, 

Office of Air Quality Planning and Standards Innovative Strategies and Economics Group, 

April 1999. 

Results in Brief 
Page 4 GAO-03-947 Clean Air Act 

rule without a detailed economic analysis. In taking this approach, the 

agency complied with its guidance for conducting economic analyses, 

which states that, to focus resources on those rules that will have a large 

impact, a screening analysis of benefits and costs may be qualitative or 

rely on limited data. From this screening analysis, EPA concluded that the 

rule would encourage energy efficiency projects while reducing emissions 

and related health risks without imposing significant economic impacts. 

Senior OMB staff responsible for reviewing the analysis said that while 

OMB concurred with EPA’s conclusion that the rule was not economically 

significant, it considered the rule significant for policy reasons. As a result, 

OMB sought to determine whether EPA could quantify the final rule’s 

potential effects, but concluded that the agency lacked the necessary data 

to do so. For example, EPA does not maintain comprehensive information 

on the economic impacts of the NSR program, and the agency could not 

model how often or when companies would decide to use any of the 

voluntary provisions of the rule. EPA later conducted two additional 

analyses of some of the rule’s impacts to provide the public with more 

information and to satisfy requirements of the Paperwork Reduction Act, 

but these were not comprehensive assessments of the final rule. Attorneys 

general from 10 Northeastern states and several environmental 

organizations have filed suit against EPA in a challenge to the final rule, 

asserting, among other things, that the rule will allow companies to 

increase their emissions. If these claims prove correct, EPA’s screening 

analysis would have underestimated the rule’s impacts because it did not 

account for costs associated with increased emissions, such as adverse 

public health effects. Because of the data limitations, it was not possible to 

verify these parties’ or EPA’s conclusions. As a result, the rule’s effects are 

uncertain. Therefore, we are recommending that EPA identify the data it 

has available, as well as additional data it needs and could obtain, to 

monitor the effects of the final rule and use the monitoring results to 

determine whether the rule has created adverse effects that the agency 

needs to address. 

EPA relied primarily on anecdotal information from the industries most 

affected by NSR in concluding that (prior to the final rule) the program 

discouraged some energy efficiency projects, including some that would 

have reduced air emissions. EPA staff responsible for this analysis said 

they relied on anecdotal information from industry sources such as 

electricity producers, chemical and forest products manufacturers, and 

petroleum refiners because they lacked comprehensive data on the 

number of projects that did not go forward as a result of NSR, such as 

upgrades to industrial boilers. These anecdotes suggested that the NSR 

program posed several barriers that discouraged some energy efficiency 
Page 5 GAO-03-947 Clean Air Act 

projects, such as the high costs of installing pollution controls and delays 

in obtaining permits that in turn delayed project construction. Several 

environmental groups, however, disagreed with industry’s claims. Because 

EPA based its conclusion that NSR discouraged some energy efficiency 

projects on anecdotal information rather than a comprehensive survey or 

representative sample of industries subject to the program, its findings are 

not necessarily representative of the program’s effect on energy efficiency 

projects throughout the industries subject to the program. In addition, 

EPA’s finding that some forgone energy efficiency projects would have 

reduced air emissions was based on the assumption that facilities would 

not increase their production levels after performing the projects. 

However, facilities’ future levels of production and emissions are 

uncertain because they may fluctuate in response to economic conditions, 

and other factors. For example, according to EPA and the executive 

director of an industry group, companies often expand production after 

implementing energy efficiency projects because it is advantageous to 

maximize production at the most efficient facilities. Such expansions 

could increase emissions and related health risks, although EPA asserts 

that this would be offset by decreased production and emissions at less 

efficient facilities. 

Under the Clean Air Act, EPA establishes health-based air quality 

standards that the states must meet and regulates air pollutant emissions 

from various sources, including industrial facilities and mobile sources 

such as automobiles and other transportation. Figure 1 compares the 

emissions of key pollutants from industrial facilities to those from 

transportation and other sources. 

Background 
Page 6 GAO-03-947 Clean Air Act 

Figure 1: Percentage of Total U.S. Emissions Released by Industrial, Transportation, and Other Sources in 2001 

Note: Percentages for carbon monoxide, nitrogen oxides, and sulfur dioxide do not total 100 due to 

rounding. 

EPA has issued health-based air quality standards for six primary 

pollutants—carbon monoxide, lead, nitrogen oxides, ozone,3

 particulate 

matter, and sulfur dioxide—that have been linked to a variety of health 

problems. For example, ozone can inflame lung tissue and increase 

susceptibility to bronchitis and pneumonia. In addition, nitrogen oxides 

and sulfur dioxide contribute to the formation of fine particles that have 

been linked to aggravated asthma, chronic bronchitis, and premature 

 3

Ozone forms when nitrogen oxides react with volatile organic compounds in the presence 

of heat and sunlight. 
Page 7 GAO-03-947 Clean Air Act 

death. In 2001 (the most recent year for which data were available), 133 

million Americans lived in areas with air pollution levels above at least one 

of the health-based air quality standards, according to EPA. 

The New Source Review program was established in 1977 and is intended 

to protect public health, as well as national parks and wilderness areas, 

from additional air pollution when new industrial facilities are built and 

existing ones expand. The fundamental logic of the program, according to 

EPA, is that industrial facilities should install modern pollution controls at 

the time of construction or when making physical or operational changes, 

such as adding new production equipment, that cause a significant 

increase in air emissions. Subject to EPA’s oversight, state and local air 

quality agencies generally administer air quality programs, including the 

NSR program. In recent years, EPA has taken enforcement action against 

companies in several industries, including some electricity producers, 

forest products manufacturers, and petroleum refineries, alleging 

noncompliance with the program. Some of these parties settled these 

cases soon after the enforcement actions were filed, although electricity 

producers assert that the actions are inconsistent with the Clean Air Act, 

according to the U.S. Department of Justice (DOJ). In January 2002, 

however, DOJ concluded that the enforcement actions are consistent with 

the act. 

Recognizing the need for revisions to the NSR program, EPA began a 

reform effort in 1992 and 1993 when it held workshops with stakeholders 

and established a federal advisory committee in 1993. Largely on the basis 

of this committee’s recommendations, EPA issued proposed NSR revisions 

in 1996 that were intended to reduce costs imposed on companies that 

undergo NSR permitting without interfering with efforts to attain air 

quality goals. EPA solicited public comment on the proposals at that time 

and again in 1998, when it sought additional information on an alternative 

method for determining whether a facility modification should be subject 

to NSR. The agency received numerous comments that provided wideranging views on how the program should be revised. Despite additional 

public meetings and discussions with stakeholders on NSR reforms, EPA 

had not developed final rules by the time the new administration took 

office in 2001. 

In May 2001, when the Vice President’s National Energy Policy 

Development Group issued its proposed national energy policy, it 

recommended that EPA report to the President on the NSR program’s 

impact on investments in new utility and refinery generation capacity, 

energy efficiency, and environmental protection. In response to this 
Page 8 GAO-03-947 Clean Air Act 

recommendation, and given that EPA does not maintain such information, 

the agency solicited public input on how the NSR program had affected 

the ability of companies to undertake energy efficiency projects in their 

existing facilities. EPA defined energy efficiency projects as those that 

would have produced greater output per unit of fuel input (e.g., more 

electricity per ton of coal burned), regardless of the effect on emissions. In 

its June 2002 NSR Report to the President, EPA concluded, among other 

things, that NSR had not affected investments in new power plants and 

refineries but had discouraged some energy efficiency projects at existing 

facilities, including some that would have reduced air emissions. 

After completing this report, EPA modified the 1996 proposed NSR 

revisions to provide regulatory flexibility to industrial facilities so that 

they could pursue energy efficiency projects, among other things. EPA 

assessed the economic impacts of implementing these revisions, and 

finalized them as a rulemaking—hereafter referred to as the “final rule”—

in December 2002. Table 1 provides a chronology of the NSR program. 

Table 1: Chronology of the New Source Review Program 

Date Description 

1970 Clean Air Act became law. 

1972 EPA created the Prevention of Significant Deterioration Program by 

rulemaking. This program implemented NSR in areas that meet air 

quality standards. 

1977 Clean Air Act Amendments of 1977 became law. 

1990 Clean Air Act Amendments of 1990 became law. 

1992-1994 EPA issued notices of violation to companies in the plywood and wood 

products industry. 

1993 EPA convened a federal advisory committee to address policy and 

technical issues associated with revising NSR. 

1996 EPA issued a NSR Simplification Proposal to streamline permitting, 

relieve regulatory burden, and provide states with flexibility. EPA also 

began investigating coal-fired electricity producers, petroleum refiners, 

and the pulp and paper industry for violations of NSR rules. 

1998 EPA solicited further public comment on NSR revisions. 

1999 DOJ filed lawsuits against seven electricity producers charging that 17 

power plants made major modifications without installing required 

pollution control equipment. 

2000-2003 EPA settled several NSR cases with electricity producers and refiners. 

May 2001 The administration’s proposed energy policy called for EPA and the 

Department of Energy to review the implementation of NSR regulations, 

and for DOJ to review existing NSR legal actions. DOJ later reported 

that the actions were consistent with the Clean Air Act. 
Page 9 GAO-03-947 Clean Air Act 

Date Description 

June 2001 EPA issued a NSR background paper as a partial response to 

recommendations in the energy plan. 

June 2002 EPA issued New Source Review: Report to the President and 

recommendations for improving the NSR program. 

December 

2002 

EPA issued the NSR final rule and nine northeast states filed suit 

challenging the final rule. 

January 2003 A tenth northeast state filed suit challenging the rule, and these states, 

California, and four California air quality agencies petitioned EPA to 

reconsider the final rule. 

July 2003 EPA announced that it would reconsider parts of the NSR final rule. 

Source: EPA and National Academy of Public Administration. 

Specific revisions in the final rule include the following: 

• a revised method for determining a facility’s baseline emissions level that 

a company would use as the starting point for determining whether any 

changes in emissions resulting from a planned physical change or change 

in the method of operation subjected the company to NSR; 

• a revised test that a company would use after establishing a facility’s 

baseline emissions level to determine if a physical or operational change 

would increase emissions beyond the NSR threshold; 

• exemptions from the program if companies demonstrate that (1) 

equipment qualifies as a “clean unit” because they already use state-of-theart pollution control equipment or (2) a proposed modification specifically 

controls air pollution and achieves an environmental benefit; and 

• a mechanism for companies to work with state or local permitting 

authorities to develop plantwide emissions limits, which would allow 

companies to make changes in one part of a facility’s operations as long as 

they offset any emissions increases with decreases elsewhere within the 

facility. 

In addition to the final rule, EPA has proposed further NSR revisions that 

the agency believes will provide greater certainty about activities that are 

considered routine maintenance, repair, and replacement. According to a 

NSR program manager, the agency is reviewing public comments on this 

proposal and expects to finalize the rule by December 2003. 
Page 10 GAO-03-947 Clean Air Act 

EPA relied primarily on the professional judgment of its staff, as well as 

public comments on the agency’s prior proposal to revise the NSR 

program, in concluding from its screening analysis that the final rule 

would not create benefits or costs beyond the $100 million threshold that 

triggers requirements for a more detailed economic analysis. EPA’s 

approach, while limited, is consistent with agency guidance for assessing 

the economic impacts of proposed rules. In addition, EPA would have had 

difficulty conducting a more quantitative analysis because of data 

limitations. OMB agreed that the rule would not have a significant 

economic impact but was significant for policy reasons. OMB asked EPA if 

it could better quantify impacts and was convinced that the agency lacked 

the necessary data to do so. EPA did later conduct two additional analyses 

of some of the rule’s costs and benefits, but they also were not 

comprehensive economic assessments. Some stakeholders have formally 

asked EPA to reconsider the rule, arguing, among other things, that it will 

enable facilities to increase their emissions. Because of the limited data on 

the NSR program, it was not possible to verify agency or stakeholder 

conclusions about the rule’s anticipated economic impacts. 

EPA’s screening analysis of the final rule’s anticipated effects was 

consistent with the agency’s guidance for conducting economic analyses. 

According to senior OMB staff, the office does not have guidance for 

agencies to use when conducting a screening analysis to determine 

whether a rule will impose significant economic impacts and, thus, merit 

further analysis. Therefore, agencies have latitude in determining how best 

to conduct a screening analysis. EPA’s Office of Air Quality Planning and 

Standards has developed a guidance document that describes the process 

agency economists should use when analyzing air quality rules. 

Recognizing the need to focus agency resources on rules that have a large 

impact, the guidance states that a screening analysis of benefits and costs 

may be qualitative in nature or rely on limited data. 

According to a NSR program manager in EPA, agency staff relied primarily 

on their professional judgment in estimating the rule’s economic impacts, 

such as its effect on air pollutant emissions and the costs companies incur 

when they install pollution controls, as well as public comments the 

agency received on its 1996 and 1998 NSR revision proposals. For 

example, several industry trade associations submitted information 

asserting that the ability to use plantwide emissions limits would reduce 

EPA’s Economic 

Analysis of the Final 

Rule Complied with 

EPA and OMB CostBenefit Analysis 

Requirements, but 

Some Stakeholders 

Have Sought to Have 

EPA Reconsider the 

Rule 

EPA’s Reliance on 

Professional Judgment 

Was Consistent with 

Agency Guidance for 

Screening the Economic 

Impacts of Rules 
Page 11 GAO-03-947 Clean Air Act 

costs for industry and provide other benefits without compromising air 

quality.4

 On the basis of this information, EPA staff determined that the 

rule would lead to overall economic and environmental benefits by 

encouraging energy efficiency projects, reducing emissions and related 

health risks, and providing economic benefits to companies affected by 

the NSR program, according to the NSR program manager. For example, 

EPA forecasted that the rule would encourage companies to implement 

energy efficiency projects that would reduce emissions, such as upgrades 

to boilers used to generate power. 

In its screening analysis, EPA assumed that the final rule would not 

impose significant economic costs on companies because the rule created 

voluntary options and companies would most likely only elect to use them 

if they thought the provisions would achieve an overall economic benefit. 

Therefore, the agency assumed that any time a company opted to use one 

of the provisions, the benefits to the company would outweigh any costs 

incurred. In addition, because EPA concluded that the rule would 

decrease emissions, it did not forecast any increases in public health costs 

resulting from the final rule, such as increased incidence of asthma or 

other respiratory problems. Consistent with its guidance, EPA then 

concluded that, because the rule was not expected to create $100 million 

in benefits or costs, the agency could proceed in finalizing the rule without 

a more quantitative and comprehensive analysis. 

Even if EPA had been required to conduct a more detailed economic 

analysis, it would have had difficulty doing so because the agency is not 

required to systematically collect comprehensive data on the economic 

effects of the NSR program.5

 Regarding the benefits of the program, EPA 

does not maintain comprehensive data on the number and type of facilities 

that obtain NSR permits, or the reduced air emissions achieved after 

facilities install pollution controls, according to a senior agency 

economist. In 2001, EPA attempted to estimate the emissions reductions at 

facilities that obtained NSR permits; however, senior agency officials 

 4

EPA also relied on an analysis of flexible permitting programs as part of the basis for the 

agency’s findings regarding the benefits of plantwide emissions limits. 

5

Under section 312 of the Clean Air Act, EPA periodically reports on the overall costs 

incurred and benefits achieved under the act. However, in fulfilling this requirement, the 

agency generally provides a comprehensive assessment of such impacts and does not 

provide a breakout of the costs and benefits of individual programs under the act. 

EPA Lacked Data to 

Conduct a More 

Comprehensive Analysis of 

the Economic Impacts of 

the NSR Final Rule 
Page 12 GAO-03-947 Clean Air Act 

responsible for the analysis acknowledged that it had several limitations.6

For example, these officials said the analysis included only facilities that 

were located in areas that met federal air quality standards, thereby 

excluding a large portion of the universe of affected facilities. In addition, 

EPA had incomplete data on facilities located in EPA region 6, which 

includes Arkansas, Louisiana, New Mexico, Oklahoma, and Texas. 

Furthermore, the analysis did not distinguish between benefits that 

resulted from the installation of pollution controls at new facilities and 

those at existing facilities, which are the focus of the final rule. With 

respect to costs, EPA is not required to maintain comprehensive 

information on the costs of the NSR program, and would therefore have 

had difficulty quantifying all of the costs of the rule, according to a NSR 

program manager. 

In addition to EPA’s lack of data on the NSR program’s benefits and costs, 

a senior agency economist said that uncertainty about the extent to which 

companies might elect to use the NSR alternatives provided in the final 

rule also limited EPA’s ability to estimate the rule’s impacts. For example, 

the economist said that the final rule allows companies to develop a 

plantwide emissions limit as an alternative to NSR, but only those 

companies that find this provision advantageous are likely to use it and 

EPA could not accurately determine how many companies this might 

include. According to EPA, companies’ decisions about whether to pursue 

voluntary options are case-specific and dependent on a number of factors. 

Therefore, the agency was unable to model how often and when the final 

rule’s options would be used. In contrast, most of the other rules EPA 

develops generally impose new requirements on a known universe of 

companies, according to a NSR program manager. In these cases, it is 

much easier to determine the costs and benefits of a rule because the 

agency can gather information from the affected companies. For example, 

if EPA required all companies within a particular industry to install certain 

pollution controls, it could gather information on the average costs of such 

equipment and the anticipated reductions in air emissions. Because of 

these data limitations we identified, it was not possible to conduct our 

own assessment of the final rule’s possible effects and verify EPA’s 

analyses and conclusions. 

 6

This analysis was summarized in an October 2001 EPA memorandum, Benefits of the 

Prevention of Significant Deterioration Program. 
Page 13 GAO-03-947 Clean Air Act 

According to senior EPA and OMB staff, OMB agreed with EPA’s finding 

that the final rule was not economically significant because it was not 

expected to impose costs or provide benefits beyond the $100 million 

threshold that triggers requirements to conduct a more thorough analysis. 

Nevertheless, according to senior OMB staff responsible for reviewing the 

analysis, while the office found EPA’s analysis—which was presented in 

an oral briefing but not documented—persuasive, OMB determined that 

the final rule was significant for policy reasons. Under Executive Order 

12866, rules that “raise novel legal or policy issues arising out of legal 

mandates, the President’s priorities” or other criteria can be categorized as 

significant. According to the Executive Order, when rules fall into this 

category, the agency issuing the rule must provide OMB with an 

assessment of the potential costs and benefits of the regulatory action, but 

the order does not elaborate on the form of the assessment. The senior 

OMB staff said that EPA’s screening analysis satisfied this requirement. 

Nevertheless, OMB staff asked EPA if it would be possible to conduct an 

analysis that quantified the rule’s effects. However, as we previously 

discussed, EPA identified numerous data limitations that it claimed 

prevented its staff from conducting such an analysis, and OMB 

acknowledged these limitations and concurred with EPA. 

In November 2002, EPA issued a supplemental analysis intended to 

provide the public with additional information on the rule’s potential 

environmental effects. According to EPA, this analysis was not intended as 

a comprehensive economic analysis of the rule’s benefits and costs and 

was not used to make decisions about the rule. Like the screening 

analysis, it relied primarily on qualitative information and arrived at 

similar conclusions. For example, EPA asserted that the exemption for 

companies that use state-of-the-art pollution controls would save 

companies NSR permitting costs. EPA also asserted that this provision 

would induce facilities to voluntarily install controls to avoid NSR, thereby 

reducing emissions. 

While the supplemental analysis was qualitative, it used some data from a 

limited number of facilities to estimate the effects of some of the rule’s 

provisions on a wider universe of facilities. Specifically, the analysis 

considered the experiences of six companies that had used regulatory 

options similar to those provided for in the final rule to determine that 

such limits would lead to emissions reductions. For example, on the basis 

of these six case studies, EPA stated that if 75 percent of facilities in three 

industry sectors opted to use plantwide emissions limits, emissions of 

volatile organic compounds could be cut by up to 17,000 tons annually 

OMB Concurred with 

EPA’s Analysis and 

Conclusions and 

Determined That Data 

Limitations Precluded 

More Quantitative Analysis 

EPA Conducted Two 

Additional Analyses of the 

Rule’s Effects, but They 

Did Not Comprehensively 

Assess Economic Impacts 
Page 14 GAO-03-947 Clean Air Act 

(less than 1 percent of the total volatile organic compounds emitted in 

2001, the most recent year for which data were available). EPA also said 

that the emissions reductions would be greater if the analysis was 

extended to other industry sectors and pollutants. 

However, EPA did not use statistically valid methods to identify the six 

companies on which it based this portion of its analysis. Therefore, the 

experiences of these companies may not be representative of how 

plantwide limits will affect emissions at other industrial companies that 

may opt to use this provision. In addition, the Secretary of the Delaware 

Department of Natural Resources and Environmental Control—the state in 

which one of the six companies was located—wrote the EPA 

Administrator cautioning against using the experience of the Delaware 

company to support the final rule. The Secretary noted that the regulatory 

option used by that company provided for emissions reductions as a 

prerequisite for participation, while EPA’s plantwide emission limit does 

not. 

As noted above, EPA could not determine with any certainty the number 

of facilities that would opt to use the final rule’s voluntary provisions, or 

the changes in the number of NSR permits, amount of emissions, or other 

effects that would result. However, EPA was required under the 

Paperwork Reduction Act to assess some of the costs and benefits that 

would accrue to companies and government agencies under the final rule. 

Specifically, the act requires agencies to estimate the record keeping 

burden associated with a rule and report this information to OMB. 

Therefore, EPA relied on limited available data and its professional 

judgment to make estimates necessary to satisfy this requirement. In 

February 2003, after issuing the final rule, EPA estimated that it would 

impose about $6.5 million in annual burden on state and local air quality 

agencies, which include legal and other costs associated with 

incorporating the final rule into the state’s air pollution control plan, 

collecting public comment on the changes, and obtaining state 

legislatures’ approval of the changes.7

 This analysis also estimated that 14 

facilities would use the final rule’s provisions during each of the first 3 

 7

During the first 3 years of implementation, the final rule will only affect regulatory 

agencies and companies in jurisdictions that meet the federal air quality standards. 

According to EPA, about 10 to 12 percent of all affected companies are located in such 

areas. Other jurisdictions are not required to revise their NSR programs to accommodate 

the final rule until 2006. Therefore, the final rule is not expected to impose costs on 

regulatory agencies and companies in these areas until 2006. 
Page 15 GAO-03-947 Clean Air Act 

years of implementation, reducing the previous annual burden by 

$650,000. This analysis, like the screening analysis, found that the rule 

would impose less than $100 million in annual costs on companies and 

government agencies. However, a senior EPA economist said this was a 

limited analysis intended to identify information collection and record 

keeping requirements that the final rule would impose. In addition, this 

analysis does not comprehensively address all of the costs that are likely 

to result from implementation of the rule. 

Nine northeast states filed a petition in the U.S. Court of Appeals for the 

District of Columbia Circuit on December 31, 2002—the day the rule was 

finalized—disagreeing with EPA’s conclusions about the rule’s effects.8

They asserted, among other things, that the final rule violated the Clean 

Air Act and would enable companies to increase their emissions because, 

by using the provisions to opt out of NSR, they will no longer be required 

to install pollution control equipment.9

 According to New York’s Attorney 

General, the final rule will lead to more smog, asthma, and respiratory 

disease. In addition, Earthjustice—acting on behalf of a coalition of 

environmental and public health advocacy groups—filed similar petitions 

for review, also in the U.S. Court of Appeals for the District of Columbia 

Circuit. According to the American Lung Association, one of the groups 

represented by Earthjustice, the final rule creates loopholes that allow 

companies to increase their emissions without installing pollution 

controls. Similarly, Environmental Defense, another group represented by 

Earthjustice, claims that the final rule will enable thousands of factories, 

power plants, and other industrial companies to pollute more.10 On 

February 6, 2002, the nine Northeast states, along with Pennsylvania, filed 

a motion, which the court denied, seeking to halt implementation of the 

final rule pending a ruling on the earlier petitions. 

 8

According to DOJ, EPA has also received eight formal petitions seeking to have EPA 

reconsider the NSR final rule. In addition to the parties identified above, four air quality 

agencies within the state of California, and the state itself have formally requested that EPA 

reconsider the final rule. 

9

Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, 

Rhode Island, and Vermont were the original petitioners. A tenth state, Pennsylvania, filed 

a petition for review on January 28, 2003. 

10This report does not address the merits of the claims made by the litigants in these cases. 

Some State Attorneys 

General and 

Environmental 

Organizations Question 

EPA’s Conclusions and 

Assert That the Final Rule 

Will Increase Emissions, 

Harming Public Health 
Page 16 GAO-03-947 Clean Air Act 

While these parties do not support the final rule, several states, including 

Indiana, Kansas, Nebraska, North Dakota, South Carolina, South Dakota, 

and Utah, as well as the American Petroleum Institute and other industry 

groups, have filed petitions with the court in support of the final rule. In 

July 2003, EPA responded in part to the petitions for reconsideration by 

requesting public comment on six limited issues in the final rule. The 

agency said that the decision to reconsider these issues did not mean that 

EPA had decided to change any aspect of the rule and that the agency 

would make that decision after the comment period closed. 

Our review did not identify any comprehensive assessments of the final 

rule’s effects that contradicted or supported the results of EPA’s analysis 

or the assertions of those who oppose the final rule. As a result, the 

economic impacts of the final rule are uncertain. Two studies 

commissioned by the Environmental Integrity Project of the Rockefeller 

Family Fund and performed by Abt Associates, an EPA contractor, 

focused on facilities that obtained NSR permits and installed emissions 

controls prior to the final rule. The studies found that the facilities would 

not have been required to install pollution controls if they had made their 

modifications after implementation of the final rule, and could have 

increased their emissions. However, because these analyses focus on just 

two facilities and only one of the four provisions of the final rule, their 

results may not be representative of the rule’s overall environmental 

effects. In addition, EPA asserts that these studies were based on an 

incorrect interpretation and application of the final rule’s provisions. 

EPA relied primarily on anecdotal information from industry in concluding 

that the NSR program, prior to the final rule, discouraged some energy 

efficiency projects—such as upgrades to industrial boilers—including 

some projects that would have reduced air emissions. The anecdotes, 

which were provided primarily by four of the industries most affected by 

the NSR program, suggested that the program imposed several barriers 

that deterred energy efficiency projects, including delays in obtaining 

permits and the high costs of installing pollution controls. Several 

environmental groups disputed EPA’s findings, and a representative of one 

group cited other factors, such as poor economic conditions and a lack of 

willingness to control air pollution, as the barriers to energy efficiency 

projects, although EPA program managers said that the agency found 

industry’s claims to be more persuasive. Nonetheless, because EPA relied 

on anecdotal information rather than a statistically valid sample or 

industrywide survey, the agency’s findings do not necessarily represent 

EPA Relied Primarily 

on Anecdotes from 

Industries Most 

Affected by NSR to 

Conclude That It 

Discouraged Some 

Energy Efficiency 

Projects 
Page 17 GAO-03-947 Clean Air Act 

NSR’s effect on energy efficiency projects throughout the industries 

subject to the program. 

According to EPA officials responsible for the NSR Report to the 

President, during development of the proposed NSR revisions, the agency 

received information regarding the program’s effect on energy efficiency 

projects from numerous stakeholders. This input included written 

responses to EPA’s request for information, as well as case-specific 

anecdotes and supplemental documents. In assessing this information, the 

agency defined any project that included a facility modification that would 

directly result in greater output per fuel input (such as more electricity 

generated from each ton of coal burned) as an energy efficiency project. 

Although EPA based its conclusion about NSR’s impact on such projects 

on the total available information, it relied heavily on anecdotes describing 

cases in which chemical manufacturers, electric utilities, forest products 

manufacturers, and petroleum refineries—four of the industries EPA 

identified as most affected by the program—had decided not to pursue 

energy efficiency projects because of NSR. While EPA also received 

comments from several environmental organizations and state and local 

air quality agencies that disputed industry’s claims, an EPA program 

manager said that the specific examples provided by industry were 

convincing. 

After obtaining the anecdotes submitted to EPA by the parties the agency 

identified as its primary data sources—including trade associations, 

individual firms, and other business interests—and removing those that 

did not address energy efficiency or contain complete information, we 

reviewed 69 anecdotes that described how NSR deterred companies from 

making energy efficiency investments. We determined that these 

anecdotes generally went through two rounds of review. First, trade 

associations said that their members reviewed and discussed the 

anecdotes before submitting them to EPA. After receiving the 

submissions, EPA program managers said they used their expertise and 

judgment to evaluate the credibility and reliability of the anecdotes. 

According to these managers, they paid specific attention to whether (1) 

the project described in an anecdote was technically feasible; (2) an 

anecdote’s conclusions about how NSR discouraged a project were 

consistent with EPA’s understanding of how the NSR provisions would 

apply to that project; and (3) the conclusions were based on “real-life,” 

rather than hypothetical, situations. EPA program managers found the 

anecdotes to be generally credible. While some may have been more 

relevant than others (e.g., “real life” examples were more relevant than 

EPA’s Conclusion That 

NSR Discouraged Energy 

Efficiency Projects Was 

Based Primarily on 

Anecdotes from Four of 

the Industries It Believes 

Are Most Affected by the 

Program 
Page 18 GAO-03-947 Clean Air Act 

hypothetical ones), none was dismissed for failing to meet these criteria, 

according to an EPA program manager. Agency staff familiar with the NSR 

program then compiled, reviewed, and synthesized this information and 

concluded that complying with NSR may have deterred some investments 

in energy efficiency projects, including some that may have reduced air 

emissions. It is important to note that the energy efficiency findings in the 

Report to the President were not the basis of the analysis of the economic 

impacts of the final rule, which found that the final rule would encourage 

energy efficiency projects, according to an EPA manager of the NSR 

program. 

The anecdotes generally cited three ways in which these industries believe 

complying with NSR discouraged energy efficiency projects, including 

concerns that (1) EPA would subsequently determine that projects 

companies initiated as routine maintenance, repair, and replacement 

without an NSR permit were actually major modifications subject to NSR 

and enforcement action; (2) the test used to measure the emissions 

impacts of company modifications was not fair; and (3) the NSR 

permitting process caused unanticipated project delays and increased 

costs. 

The first barrier, concerns about possible enforcement actions, stemmed 

from recent EPA enforcement litigation against certain electricity 

producers in which EPA contested industry’s claims that certain projects 

were exempt from NSR because they qualified as routine maintenance. 

EPA maintained that these projects were in fact major modifications that 

should have triggered NSR. According to senior industry representatives, 

this meant that EPA could consider potentially thousands of projects that 

industry had previously completed without an NSR permit under this 

exemption as NSR violations, including some that state and local air 

quality agencies had approved and confirmed did not trigger NSR. This 

prompted some industry officials to allege that EPA was reinterpreting 

what could be considered routine maintenance exempt from NSR. EPA’s 

Office of Enforcement, however, maintains that the agency is correctly 

interpreting and enforcing the program. 

According to senior representatives of the electric utility and refining 

industries, this litigation has produced substantial uncertainty for 

companies pursuing facility modifications. Part of this uncertainty may 

stem from what industry officials describe as a lack of clear policy 

guidance on what qualifies as routine maintenance. EPA has never 

explicitly defined routine maintenance since the exclusion was 

established, although some clarification has grown out of EPA 
Page 19 GAO-03-947 Clean Air Act 

enforcement, most notably in the case of Wisconsin Electric Power Co. v. 

Reilly (WEPCO). This court decision upheld EPA’s consideration of the 

nature, extent, purpose, frequency, and cost of facility modifications, as 

well as other relevant factors, when determining whether a project 

qualifies for the routine maintenance and repair exemption. EPA 

maintains that it takes a case-by-case approach to determining whether a 

modification constitutes routine maintenance, and has cited WEPCO as 

support for its recent enforcement actions. 

However, industry comments submitted to EPA claim that the agency’s 

enforcement actions, combined with what they regard as a lack of clear 

guidance, make it difficult for them to reliably predict when their projects 

will trigger NSR, especially when EPA may later disagree with state and 

local NSR determinations. Companies are therefore reluctant to perform 

projects that could trigger NSR or possible enforcement litigation, 

including, they assert, energy efficiency projects. According to EPA, the 

agency’s proposed rule on the routine maintenance exemption would 

address some of these concerns by changing its definition. EPA expects to 

issue the rule by the end of 2003. 

Several environmental groups disputed EPA’s findings. For example, an 

environmental advocacy group involved in NSR issues claimed that the 

proposed rule would simply broaden the exemption in violation of the 

Clean Air Act. One alternative in the proposed rule would allow companies 

to claim as routine maintenance any modifications as long as they cost less 

than a certain percentage—depending on the industry—of the total cost of 

the polluting unit, such as a boiler, or the entire facility. Another 

alternative would allow companies to invoke the routine maintenance 

exemption if they are replacing equipment that performs the same 

function as its predecessor and does not alter the basic design of a facility. 

Environmentalists assert that these exemptions will allow companies to 

falsely treat major plant modifications as routine maintenance, avoid NSR 

requirements, and increase emissions. 

The second barrier cited in the anecdotes was the test used to determine 

whether a modification would increase emissions beyond the NSR 

threshold. Under the program prior to the final rule, companies making 

physical or operational changes that did not qualify for exemptions, such 

as the routine maintenance exemption, had to undergo this test to gauge 

the changes’ effects on emissions. Before the final rule, a company was to 

compare a facility’s emissions during the previous 24 months to its future 

potential emissions if its facility was run at maximum capacity or the 

highest capacity allowed by the existing NSR permit after making the 
Page 20 GAO-03-947 Clean Air Act 

change, even if the facility had not run at this level before, or did not plan 

to in the future. If the expected future emissions resulting from the change 

were more than 40 tons per year higher after making the change, the 

project qualified as a significant emission increase and triggered NSR.11

Companies (except electric utilities) could request that the permitting 

agency allow the use of any different two-year period based on a 

demonstration that it is more representative of normal operation. Electric 

utilities may use any 2-year period in the previous 5 years as their actual 

emissions baseline. 

Industry submissions to EPA on the NSR program asserted that having to 

assume maximum capacity biased the test and significantly overstated the 

true emissions impact of a project. They cited cases where they expected a 

project to reduce emissions, but the test showed that it would increase 

them. For example, a refinery planned to implement a project that it 

expected would improve the energy efficiency of a furnace by 5 percent. 

While the furnace was permitted to emit 45 tons of air pollution per year, it 

was not operating at full capacity and was therefore only emitting 35 tons 

per year. According to the facility’s submission, the project would 

decrease annual emissions to 32 tons per year through more efficient fuel 

combustion while running at the same capacity. However, the emissions 

test required the refinery to compare its historical emissions—35 tons per 

year—with its future potential emissions running at full capacity—45 tons 

per year. Because the facility was located in an area where a 10 ton per 

year increase triggers NSR requirements, the facility would have had to 

obtain an NSR permit for the modification. 

Likewise, a pulp and paper mill planned to install an air flow system that 

would allow its boiler to more efficiently burn natural gas, creating annual 

savings of $1 million. By using less fuel, the project was also expected to 

reduce future emissions of carbon monoxide, nitrogen oxides, and volatile 

organic compounds. However, the facility had been operating below its 

maximum capacity during the 24 months preceding the planned 

installation. Therefore, when managers compared the facility’s actual 

emissions during this period to its future potential emissions, assuming it 

would operate at maximum capacity after the modification, the projected 

emissions increase qualified as a major modification, even though the 

 11Forty tons per year is the threshold for emissions of nitrogen oxides, sulfur dioxide, and 

volatile organic compounds in areas with good air quality, but the level can be lower in 

areas with poorer air quality. 
Page 21 GAO-03-947 Clean Air Act 

project was expected to reduce emissions. If the company proceeded with 

the project under NSR and installed the best available pollution controls, it 

would incur $17 million in total costs, making the project cost-prohibitive, 

according to the industry submission. 

While these anecdotes assert that having to assume maximum capacity 

under this test was unfair, the NSR program required facilities to assume 

that the changed equipment would operate at the maximum level allowed 

in its operating permit unless the owners or operators of the facility made 

a legally binding commitment to operate at lower production levels, 

according to EPA. Otherwise, EPA and state and local air quality agencies 

would have no way of ensuring that companies would not have a 

significant increase in emissions under the NSR rules after making a 

physical change, according to EPA. In addition, EPA acknowledged in its 

Report to the President that performing an energy efficiency project can 

provide an economic incentive to increase production levels at more 

efficient facilities, potentially resulting in increased emissions. However, 

EPA’s new final rule now gives a company the option to compare a 

facility’s previous emissions to its projected actual emissions, instead of 

its maximum potential emissions. EPA believes that this new test will 

remove disincentives that discourage facilities from making the types of 

changes that improve operating efficiency, implement pollution prevention 

projects, and result in other environmentally beneficial changes. In 

addition, EPA asserts that the new record keeping and reporting measures 

required with this option will provide the information necessary for 

reviewing authorities to ensure that such changes are made consistent 

with the Clean Air Act. 

The anecdotes also identified a third barrier. According to industry, 

unpredictable delays associated with the NSR process disrupt a project’s 

planning and construction timetables, increasing project costs. Program 

managers and technical directors representing forest product companies, 

chemical manufacturers, refineries, and utilities commented on this issue, 

stating that the NSR permitting process can last anywhere from 6 to 24 

months, thereby delaying or disrupting project planning and construction. 

Petroleum refinery representatives claimed to be uniquely affected by this, 

asserting that NSR permitting delays made it difficult for them to meet 

federal mandates and deadlines for producing cleaner-burning gasoline, 

potentially subjecting them to fines and enforcement actions. Industry 

officials also claimed that project delays they attributed to NSR permitting 

resulted in equipment wearing out, increasing replacement costs, and 

raising safety issues. They also stated that certain repair projects required 

quick decisions and turnaround, both of which are not compatible with the 
Page 22 GAO-03-947 Clean Air Act 

amount of time it takes to obtain an NSR permit and install the appropriate 

pollution controls. An EPA NSR program manager confirmed that 

permitting delays could hinder energy efficiency upgrades in emergency 

situations where a company needs to quickly replace broken or worn out 

machinery and would like to install more efficient equipment. However, 

the program manager said such situations are rare and that the timelines 

for planned facility upgrades are generally compatible with the NSR 

permitting schedule. In addition to permitting delays, some of the 

anecdotes also asserted that, if a project triggered NSR requirements, the 

costs of installing pollution controls would have outweighed the 

anticipated benefits of the project. 

In an April 2003 report to the Congress on the NSR program, the 

National Academy of Public Administration (NAPA) stated that while a 

lack of data prevented the organization from determining the extent to 

which NSR has impeded energy efficiency improvements, NSR might 

indeed have discouraged some industrial sources from undertaking 

economically and environmentally sound maintenance and energy 

efficiency projects. However, according to NAPA, some facilities continue 

to operate without modern pollution controls because of widespread 

noncompliance with NSR or flaws in its implementation. NAPA said that 

these facilities have an advantage over their competitors because they 

have not incurred the costs of controlling emissions, and that such 

facilities have little basis to complain that NSR has adversely affected the 

efficiency of their operations. An EPA manager for the NSR program took 

exception to NAPA's findings, stating that EPA and the states have 

enforced the program over the years. The official also said that facilities 

only trigger NSR when they make physical changes in, or changes in the 

method of operation of, their facilities that significantly increase 

emissions. Therefore, if the facilities NAPA refers to have not undertaken 

such modifications, they have complied with the program, according to 

the official. 

Several environmental groups experienced in NSR issues disagreed with 

industry’s claims about the NSR program’s effects on energy efficiency. A 

representative of one such group, who has testified before the Congress 

on NSR, pointed out that if companies truly wanted to avoid NSR, they 

could accept an emissions limit in their operating permit and make a 

formal commitment to not emit above the NSR threshold. Companies that 

agree to such limits may make any modifications they want without 

triggering NSR, provided they do not exceed the limit. With this option 

available, the representative asserted that the NSR process could not deter 

The National Academy of 

Public Administration and 

Environmental 

Stakeholders Reached 

Different Conclusions 

about NSR’s Effects on 

Energy Efficiency 
Page 23 GAO-03-947 Clean Air Act 

energy efficiency projects that were expected to reduce emissions because 

they would not trigger NSR, since they would not increase emissions 

above the program threshold. For example, a source with an operating 

permit limit could make a physical or operational change without an NSR 

permit and increase emissions by 39.9 tons per year (where the threshold 

is 40 tons per year) and not trigger NSR. The environmental representative 

cited other factors, such as poor economic conditions and a lack of 

willingness to control air emissions, as the primary factors hindering 

companies from pursuing these projects, rather than compliance with 

NSR. 

Representatives of the chemical, forest products, and electric utility 

industries disagreed with this position and said that companies are 

reluctant to accept an operating permit limit because they would be giving 

up their flexibility to increase production in response to changing 

economic and market conditions, just for the sake of one energy efficiency 

project. A trade association representing the chemical industry also told us 

that the lengthy and protracted process for obtaining an operating permit 

makes it impractical to renegotiate a permit limit every time a company 

wants to undertake an energy efficiency project. 

As EPA notes in its Report to the President, its conclusions about the 

effect of NSR on energy efficiency projects are based on anecdotal 

information because the agency lacked comprehensive data on the 

number of projects that did not go forward as a result of NSR, according to 

EPA program managers. Because EPA based its conclusions on anecdotes, 

the agency’s findings do not necessarily represent NSR’s effect on energy 

efficiency projects within the industries that provided the anecdotes or 

across all industries subject to the program. Reaching such conclusions 

about the program’s broader effects on energy efficiency projects would 

have required gathering information from either a statistically valid sample 

of companies subject to the program or a comprehensive survey of 

affected industries. Conducting such an analysis, however, would have 

required substantial resources. 

In addition, EPA’s conclusion that the NSR program had discouraged some 

energy efficiency investments that would have reduced emissions was 

based on the assumption that the companies would not increase their 

production after completing the energy efficiency project, according to an 

EPA official responsible for the analysis. Under this assumption, 23 of the 

69 anecdotes predicted that the proposed projects would decrease 

emissions, 11 predicted an increase, 2 predicted no change, and 33 (or 48 

The Anecdotes Do Not 

Necessarily Represent 

NSR’s Effect on Energy 

Efficiency Projects 

Industrywide or Their 

Overall Impact on 

Emissions 
Page 24 GAO-03-947 Clean Air Act 

percent) did not include sufficient data to determine the emissions 

impact.12 However, facilities’ future production levels and air pollutant 

emissions may fluctuate in response to changing economic conditions and 

other factors. In addition, performing an energy efficiency project can 

provide an economic incentive to increase production levels at more 

efficient facilities, potentially increasing emissions and related health 

risks. 

The executive director of one industry trade association stated that it 

would make economic sense to increase production at more efficient 

facilities. The representative “could not imagine a utility spending money 

on extra capacity, and then not utilizing it.” In addition, according to EPA, 

production at more efficient facilities could supplant that at less efficient 

and higher-emitting facilities. Therefore, even in cases where an energy 

efficiency project was expected to reduce emissions, future increases in 

production after implementing a project could possibly increase 

emissions, as well as related health risks, past the NSR threshold. 

On the other hand, according to an EPA official responsible for the 

agency’s energy efficiency analysis, the agency expected that if a company 

increased production at its more efficient facilities, it could decrease 

production at its less efficient facilities. Therefore, any emissions 

increases due to higher production levels at more efficient facilities would 

be offset by decreased production elsewhere. In addition, a facility’s 

emissions could decrease more than expected after implementing an 

energy efficiency project if the facility decreased production, for example, 

due to poor economic conditions. An EPA program manager said that the 

agency has not analyzed the air pollution impacts of shifts in production 

that facilities make after implementing energy efficiency projects. 

While EPA determined that the final rule would lead to overall economic 

and environmental benefits, these effects are uncertain because of limited 

data and difficulty in determining how industrial companies will respond 

to the rule. Consistent with the relevant executive order and guidance, 

EPA conducted a limited analysis that determined that the rule was not 

economically significant, and OMB concurred. In addition, EPA identified 

data limitations that prevented the agency from conducting a more 

 12The anecdotes did not always include sufficient information to determine the magnitude 

of anticipated emissions changes after completing an energy efficiency project. 

Conclusions 
Page 25 GAO-03-947 Clean Air Act 

quantitative analysis. Some stakeholders disagree with EPA about the 

rule’s effects, contending that the rule will allow companies to increase air 

pollutant emissions, resulting in adverse public health effects. If these 

stakeholders are correct, the final rule could exacerbate existing air 

pollution problems—133 million Americans already live in areas with air 

pollution levels above at least one of the health-based air quality 

standards—and impose negative economic impacts that EPA did not 

account for in its analysis of the rule. 

Because of the lack of data and uncertainties about the NSR final rule’s 

impacts, we recommend that the EPA Administrator: 

• determine what data are available that the agency could use to monitor 

the emissions impacts of the rule, 

• work with state and local air quality agencies to identify any additional 

data needs and possible ways to fill them, and 

• use the monitoring results to determine whether the rule has created 

adverse effects that the agency needs to address. 

We provided EPA and OMB with a draft of this report for review and 

comment. We subsequently received comments from both agencies. EPA 

said that the report was accurate and that the agency agreed with our 

conclusions and recommendation. OMB said that the report was accurate 

but raised several questions about EPA’s potential implementation of the 

recommendation. Specifically, OMB said it would be difficult for EPA to 

gather data to monitor the rule’s effects and that attributing emissions 

changes to the final rule would pose challenges. For example, OMB said 

that it would be difficult to determine the level of emissions facilities 

would have released in the absence of the final rule. EPA, however, said 

that the recommendation acknowledges these challenges and provides 

flexibility for the agency to work with state and local agencies to identify 

data collection strategies. EPA and OMB also recommended a number of 

technical changes to the report, which we have incorporated into this 

report as appropriate. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 10 days from the 

report date. At that time, we will send copies to the EPA Administrator, 

Recommendations for 

Executive Action 

Agency Comments 
Page 26 GAO-03-947 Clean Air Act 

the Director, Office of Management and Budget, interested congressional 

committees, and other interested parties. We will also make copies 

available to others upon request. In addition, this report will be available 

at no charge on GAO’s Web site at http://www.gao.gov. 

If you or your staffs have any questions, please call me at (202) 512-3841. I 

can also be reached at StephensonJ@gao.gov. Key contributors to this 

report are listed in appendix II. 

John B. Stephenson 

Director, Natural Resources and Environment 
Page 27 GAO-03-947 Clean Air Act 

The Ranking Minority Member of the Senate Environment and Public 

Works Committee and Senator Lieberman asked us to determine the basis 

of (1) EPA’s analysis of the economic impacts of the final rule and its 

conclusion that the rule would not create significant enough benefits or 

costs to merit a more detailed analysis and (2) EPA’s conclusions that the 

NSR program (prior to the final rule) discouraged some energy efficiency 

projects. 

To respond to the first objective, we used OMB and EPA guidance to 

review EPA’s screening analysis of the final rule’s economic impacts. EPA 

issued its guidance to ensure that its economic analyses comply with the 

Unfunded Mandates Reform Act of 1995 and Executive Order 12866. These 

directives require federal agencies to analyze the economic effects of rules 

that may impose annual costs on the government or private entities of 

more than $100 million. In addition to reviewing EPA, OMB, and other 

federal requirements and guidance on conducting economic analyses of 

proposed rules, we reviewed two additional EPA analyses of the final 

rule’s effects, as well as documents from environmental groups, industry 

trade associations, and other interested parties related to the costs and 

benefits of the final rule. Furthermore, we met with the NSR program 

manager within EPA and other senior officials within the agency’s Office 

of Air Quality Planning and Standards. We also met with senior OMB staff 

responsible for reviewing EPA’s analysis within the Office of Information 

and Regulatory Affairs. 

To respond to the second objective, we reviewed information provided to 

EPA by outside organizations that the agency relied on in preparing its 

findings on the NSR program’s effects on energy efficiency projects at 

industrial companies. This information consisted of written comments, 

case-specific examples of foregone energy efficiency projects, and 

supplemental documentation submitted to EPA by individual firms, 

industry trade associations, and environmental advocacy groups during 

EPA’s public comment period. We obtained documents through the EPA 

public docket A-2001-19, and directly from those companies and 

organizations who submitted information to EPA. We also obtained 

documents or conducted interviews with parties identified by EPA as the 

primary data sources underlying its energy efficiency findings, including 

representatives of the American Chemistry Council, the American Forest 

and Paper Association, the American Petroleum Institute, the American 

Public Power Association, British Petroleum, Detroit Edison, Duke 

Energy, the Edison Electric Institute, Excel Energy, Exxon Mobil, the 

National Coal Council, and the National Petrochemical & Refiners 

Association. Once we obtained anecdotes provided by the parties EPA 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology 

Page 28 GAO-03-947 Clean Air Act 

identified as its primary data sources, we removed those that did not 

pertain to the NSR program’s effects on energy efficiency as well as those 

that did not provide sufficient information for analysis. We then reviewed 

the 69 remaining anecdotes to assess their anticipated effects on 

emissions. We did not independently verify the factual basis of the 

anecdotes. We also spoke with the Natural Resources Defense Council, a 

national environmental advocacy organization that disputed EPA findings. 

Finally, we spoke with the NSR program manager within EPA and another 

official within the agency’s Office of Air Quality Planning and Standards 

who were responsible for the Report to the President. 

We conducted our work between August 2002 and August 2003 in 

accordance with generally accepted government auditing standards. 
Appendix II: GAO Contacts and Staff 

Acknowledgments 

Page 29 GAO-03-947 Clean Air Act 

John B. Stephenson (202) 512-3841 

Eileen R. Larence (202) 512-6510 

In addition to the individuals named above Tim Guinane, David Hancock, 

and Michael Hix made key contributions to this report. Nancy Crothers, 

Karen Keegan, Jeffrey Larson, Judy Pagano, Lisa Turner, and Laura 

Yannayon also made important contributions. 

Appendix II: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Acknowledgments 

(360258) 
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